While the average American has likely never heard of the term “FinTech” they may at least be familiar with some of the field’s applications. Thanks to highly publicized campaigns on crowdfunding sites like Kickstarter and Indiegogo the idea of raising funds on the internet no longer seems that strange. Still some may have questions about lenders like Lending Club that use a similar concept to offer personal and small business loans to consumers. With the recent resignation of Lending Club’s former CEO and founder Renaud Laplanche it’s a good time to review Lending Club and see if they are still worth considering as an investment and funding platform. In this review we’ll take a look at the history of Lending Club, how their peer to peer platform works, what loan products they offer, and what those who have borrowed or invested on the site have to say about their experience.
A Brief History of Lending Club
Lending Club was founded in 2007 by Renaud Laplanche. According to the story the idea struck him while he was reviewing his banking and credit card statements. Laplanche saw a discrepancy in the amount the bank was charging him to borrow money via a credit card (about 18% if he had carried the balance over) versus how much the same bank gave him in interest on his savings account (about 1%). That’s when he realized that one of the reasons for the high cost was the inefficiency of the banking system. To reduce overhead and build an efficient banking system, Lending Club launched online — originally creating a Facebook app before building their own site. Without having to manage branches like traditional banks do, the company is able to save money and offer better rates to consumers as a result.
While the company still operates strictly on the internet, it has partnered with banks both large and small in recent years to offer banking customers loans on the Lending Club platform. Since 2007 the company has facilitated over $19 billion in loans. Over the years Lending Club has expanded the number of loan products they offer and, in addition to the bank partnerships, have also worked with companies such as Alibaba and Sam’s Club to bring even more borrowers to their platform. In 2014 the company went public and is now listed on the New York Stock Exchange under the ticker symbol ‘LC‘.
How Peer to Peer Lending Works
So what exactly about Lending Club’s platform makes it so efficient? The company participates in what is known as peer to peer (P2P) or marketplace lending. Instead of Lending Club filling requests for loans, the company offers investors the chance to fulfill approved loans and receive a portion of the interest. While some argue that this leaves Lending Club with little skin in the game, it’s important for the company to keep its investors happy and the way to do that is to have them continually seeing good returns.
Lending Club uses a number of metrics to assess the creditworthiness of applicants. Once approved, each applicant is then offered an interest rate based on their credit. The loans range from ‘A’ to ‘G’ with ‘A’ being the most prime. Approved loans are then placed on the platform for investors to fulfill — a process that could take minutes or days — by kicking in as little as $25 towards any given loan. Once the loan is fulfilled, the borrowers receive the money in their account. Lending Club’s loans are paid back monthly and carry fixed rates. Additionally there are no prepayment penalties should a borrower be able to pay back their loan early.
Types of Peer to Peer Loans
Many borrowers use personal loans from Lending Club to consolidate their credit card debt and lock in a lower fixed rate. The company offers loans for up to $40,000 that can also be used for things like building a pool, renovating a home, or refinancing an auto loan. For those interested in a loan you can use their convenient calculator to determine what your payments would be and your potential savings compared to other options.
Small Business Loans
Following the success of their personal loans, Lending Club’s first big expansion was into small business loans. Today entrepreneurs can borrow up to $300,000 for their business but, as of now, applicants have to have been in business for a minimum of two years and have at least $75,000 in annual revenue. Additionally the applicant must own at least 20% of the business and have personal credit score that is at least “fair.”
In 2014 Lending Club acquired Springstone Financial, a company that specialized in patient financing. That acquisition has made it possible for practices to offer their patients financing through the Lending Club platform.
What Do Users Say
Those who have used Lending Club on the borrowing and investor side have had positive things to say about the experience:
On Lending Club’s review page, many borrowers praise the company for the ease of applying and the speed in which they receive their loans. Reviewers on Credit Karma have also given the company’s platform high marks. Additionally data released by Lending Club shows that their personal loan customers reports saving 33% compared to what they were paying previously.
As a recent MarketWatch article noted, one great thing about investing on the Lending Club platform is the ability for lenders to manage their risk in a number of ways. Since the company only requires investments of $25 on any given loan, lenders are able to diversify and balance their riskier loans with more conservative one. In fact, according to figures released by the company, 99.9% of investors who hold at least 100 notes (with no one loan making up more than 1% of their account) have seen positive returns. On average historical returns for loans graded ‘A’ have provided returns of 5.23% while ‘B’ and ‘C’ loans have seen returns of 7.38% and 8.82% respectively.
With over $19 billion in loans, Lending Club is by far the largest lender in the peer to peer space. Their reviews from customers show that that is no fluke. Although the recent turmoil has certainly had an impact on its stock price, Lending Club remains one of the biggest players in the FinTech sector and could end up being on the biggest names in finance.